- Southern Company has seen some solid improvements in its business of late.
- Southern is focusing on controlling costs to further enhance its bottom line.
- Positive economic indicators and an attractive valuation make Southern a solid investment.
Public electric utility company Southern Company (NYSE:SO) has turned in a very impressive performance in 2013. The company's shares are up 10%, which is quite impressive considering that Southern also carries a strong dividend yield of 4.60%. Although Southern faced certain operational, regulatory, and financial challenges in 2013, it met them successfully, and looks set to get even better going forward.
Improvements all around
Southern's transmission and distribution reliability are improving, continuing a trend of improvement over the past decade. Looking ahead, things could get even better as in Georgia, the public service commission (PSC) has approved a constructive three-year agreement for Georgia Power. Meanwhile, Georgia Power has also completed an integrated resource plant in the third regulatory proceeding.
In Florida, the PSC approved the settlement agreement reached between Gulf Power and all of the interveners in the rate case. In Mississippi, Southern reached a settlement in January 2013 that paved the way for Kemper-related rate increases in 2013 and 2014 and a subsequent rate increase in 2015 for the securitization of certain project costs.
Southern Company was also able to achieve a new all time record low in recordable incidence rate. It also witnessed reductions in loss work day cases and preventable vehicle accidents for the third consecutive year.
Southern overcame early issues with sub module fabrication and documentation in Lake Charles, Louisiana. The company's ability to work through challenges indicates the strong relationship it has with Chicago Bridge & Iron and Westinghouse, apart from illustrating its rigorous oversight in place for this project.
The site is expected to develop strongly this year. Product risks on the Turbine Island and Cooling Tower for Unit 3 are expected to stay and the Nuclear Island for Unit 3 is expected to show exceptional performance. The progress at Unit 4 should continue.
The company is also making solid progress in the Kemper IGCC project. The transmission infrastructure was completed during 2013 with pipelines all completed, and the lignite mine was placed into service. Approximately more than 75% of the piping has been installed and testing of the combined cycle is underway.
Cost control and positive indicators
Southern used natural gas mostly to generate electricity throughout most of January, generating approximately $1 million in savings to offset project costs. The gasifier testing projected for the second quarter will mark the first heat up of a gasifier at the facility. A reliable supply of syngas to the combined cycle is the key milestone expected prior to commercial operation.
Southern is positive about the economic indicators as well. The momentum experienced during the second half of 2013 is expected to carry over into 2014, with anticipated GDP growth of between 2.5% and 3%. Industrial activity and exports are expected to be the key drivers with growth expected in chemicals, steel, auto manufacturing, and transportation.
The company also expects an increase in single family home starts with the dynamics of supply and demand returning to historical levels for the sector. This continued recovery of the housing sector will support stronger residential customer growth.
However, a slow EPS growth in the range of 3% to 4% is forecasted for 2015 and 2016, largely due to a slower level of capital spending, especially relative to a capital base that has grown significantly in recent years with new generation and environmental investments.
Quarterly Revenue Growth
Quarterly Earnings Growth
Earnings CAGR Next 5 Years (per annum)
Source: Yahoo! Finance
Southern's trailing P/E and forward P/E ratios of 23.73 and 15.51, respectively, indicate the company's growth prospects. Based on these numbers, it can be seen that analysts expect an increase in earnings as a result of Southern's cost-control initiatives and new projects.
In addition, being a utility company, Southern pays a solid dividend. As we see above, since the company's earnings are expected to grow at a consistent rate going forward, investors can expect regular dividend hikes.
Southern Company's performance has been very strong this year and the same is expected to continue in the future. The company is rightly focusing on controlling costs and is increasing efficiency at the same time. Hence, Southern is still a good investment despite its rise this year.